Perfect Storm Ahead

By all indications this is the week that the global credit crisis is going to break down the system. Unless drastic action is taken, we're going to see somebody big default and soon. That bailout has done nothing to loosen the credit markets. The Nikkei is down almost 400 points this morning. Euro markets are expecting that kind of drastic action and are looking for big gains on Monday after this weekend's emergency summit and Germany's agreement to insure all private bank deposits.

Germany acted to stem turmoil in its financial sector on Sunday, thrashing out a new rescue for imperiled lender Hypo Real Estate and, in a surprise move, pledging to guarantee private savings accounts.

After German banks and insurers shocked the government on Saturday by withdrawing support for a government-led 35 billion euro ($48.50 billion) rescue for HRE, Berlin scrambled to hammer out a new deal before markets opened on Monday.

Under an accord, struck just after 11 p.m. local time, the financial sector agreed to provide an extra 15 billion euros ($20.8 billion) in liquidity for HRE on top of the 35 billion they had already committed together with the Bundesbank, the Finance Ministry said.

"With this commonly forged solution, (Hypo Real Estate) will be stabilized and thereby the German financial marketplace strengthened in difficult times," the ministry said.

Earlier, the government said it had agreed to guarantee private deposits to help restore confidence amid the worst financial crisis since the 1930s.

"We say to savers that their deposits are safe," Chancellor Angela Merkel told a news conference in Berlin.

We'll see if it helps. Here in the States, officials are worried the rules and regs for the new bailout system may put them out of business if they agree to the bailout.

Last Monday, after the bill was thrown out by the House of Representatives, more than $1 trillion was wiped off the value of US stocks as the market was gripped by panic. The bill was passed on Friday afternoon, however, after the inclusion of $149bn of tax breaks and strict rules for participating banks.

But Wall Street analysts, believe the addition of so many terms to the bill might deter potential participants.

One of the least attractive elements is a section designed to curb executive pay at banks that participate in the bail-out package. These include limiting stock-related pay and banning 'golden parachutes' for executives.

'I think this hodge-podge of regulations and rules will be enough to put many [chief executives] off participating,' Caldwell said.

Sources close to Goldman Sachs and Merrill Lynch indicated the banks might choose not to participate in the bail-out as there is a growing view on Wall Street that the market may be bottoming out.

Analysts also believe that the mere presence of the government as buyer of last resort will be enough to get credit markets moving again, and that a large number of banks would not need to take part for the legislation to succeed.

In other words, now that the bailout is passed...Wall Street doesn't believe they need to actually participate in it, and the bailout's presence itself will jumpstart the markets and end the credit crisis.

So you see, just the promise of $700 billion will allow Wall Street to work again. They didn't actually NEED out taxpayer money, you see. Just the promise of it. After all, that money comes with strings these companies don't like, such as ACTUAL OVERSIGHT.

Wall Street will pass. Besides, they're waiting for that inevitable Fed rate cut. They have time now thanks to us.

Of course, that was the plan all along. It should be as effective as the last nine months of market interference has been.